Argentina’s future divides analysts

Argentina’s dollar debt won a vote of
confidence from Wall Street on Monday despite a downgrade of
the sovereign’s external bonds by ratings agency
Moody’s.

Bank of America-Merrill Lynch upgraded Argentine bonds to an
effective buy, following an apparent stabilization in its
foreign exchange reserves and fresh indications the country
could finally resolve $10 billion in outstanding debt owed to
the Paris Club group of creditor nations following the
sovereign’s 2002 default — a necessary
step for any normalizing of its international financial
relations.

"We expect several positive developments in the coming weeks
that will support bond prices. These include a positive harvest
that will help building reserves, potential subsidy cuts, and
continued negotiations with the Paris Club and holdouts," BAML
analysts wrote in the note. The bank accordingly moved its
Argentina recommendation to overweight from market weight.

This came as Moody’s downgraded
Argentina’s government bond rating to Caa1 from
B3, with a stable outlook. The ratings agency cited a
"significant fall" in official reserves — which have
plummeted to $27.5 billion from a high of $52.7 billion in 2011
— together with an "inconsistent policy environment"
that is likely to put pressure on reserves and foreign-currency
debt service obligations for the foreseeable future.

Argentine bonds reacted little in secondary market trading
on Monday according to one credit analyst, who saw the
sovereign’s 2033 euro notes marked around 70 cents
and its 2017 dollar bonds around 87 to 88.

David Rees, an economist at Capital Economics in London,
said Argentina’s reserves were only enough to
cover five months of imports and would likely to drop to the
three-month minimum level by the middle of this year. The
decline has raised concerns over Argentina’s
ability to service its debts and sustain the peso at a target
of 8 per dollar. Rees said the peso was likely to drop to 10 by
the end of 2014. The government is betting that a surge in
agricultural exports will reverse the slide in foreign currency
reserves.

But Rees said authorities would nevertheless "have a pretty
tough job on their hands to prevent hard currency from leaking
out of the economy". The Paris Club — which includes
creditor nations Japan, the US, Germany and France —
said on Friday it had invited Argentina to begin talks to
settle outstanding debt during the week of May 26.
LF